Vice Chairman Hopes Rise in Interest Rates Only Temporary : Fed Says Its Move Hurts Housing Sector

The No. 2 official of the Federal Reserve Board said Tuesday that the central bank’s decision to push interest rates higher will adversely affect some sectors of the economy such as housing, but he said he hoped the rise in rates will be temporary.

Fed Vice Chairman Manuel Johnson also warned that a further decline in the value of the dollar could be harmful but said the volatile currency markets were close to stabilizing.

Johnson said the board was forced into a slight tightening of credit conditions to dampen rising inflationary pressures, caused in part by the steep decline in the value of the dollar.

Johnson said the decision, which was disclosed last week by Fed Chairman Paul A. Volcker, “obviously will lower the performance of interest-sensitive sectors” such as housing. However, he said: “Even though some of the interest-sensitive sectors may slow down as a result, I think the overall performance of the economy will be better in the long term.”

For two years the Fed had been pursuing a policy of driving interest rates lower in an effort to stimulate a sluggish U.S. economy. Its efforts, coupled with a sharp drop in inflation last year, helped to drive a variety of rates, including mortgage rates, to their lowest levels of this decade.

However, in congressional testimony last Thursday, Volcker confirmed that the Fed has reversed course and begun a modest tightening of interest rates to defend the dollar, whose sharp fall on exchange markets had triggered concerns about rising inflation in this country.

Johnson, appearing Tuesday before the Society of American Business and Economic Writers, said Fed officials believe that the dollar has declined sufficiently to improve the nation’s huge trade deficit and that a further decline would be detrimental to economic growth not only in the United States but worldwide.

“Things are very close to a stable situation,” Johnson said.

However, he added that much depended on the United States’ key trading partners, West Germany and Japan, taking steps that would help stabilize their currencies against the beleaguered dollar and on the ability of the U.S. government to cut its huge budget deficit.